Inflation falls back but remortgaging is still an option

Those homeowners who have been keeping their eye on the news recently will probably know that consumer prices index inflation has dropped back after March's worrying high of 3.1 per cent and is now at a more comfortable 2.8 per cent.

Of course this is good news for homeowners who have had to cope with four interest rate increases since last August, which has seen the cost of monthly mortgage payments shoot up, hitting those on variable rates particularly hard.

Over the past month or so there has been little let-up from banks and price comparison sites urging borrowers to remortgage to a cheap fixed-rate deal and I don't think they're going to stop just because inflation has come down slightly.

This is because long-term inflation is something the Bank of England still has to tackle. And unless it becomes clear that underlying price pressures are easing, it is more than likely that the Bank of England will vote to raise rates again over the next three months.

Even as I write, the Bank has released its latest quarterly inflation report in which it suggests that rates will have to go up at least once more this year to bring prices under control. It is eminently sensible, therefore, that households take action now to ensure some level of protection, as another increase is likely to drive up fixed rates and reduce the discounts on tracker mortgages.

After last week's rate rise, it was widely reported in the nation's press that homeowners with a typical mortgage of £100,000 will have to pay an extra £16 a month. Now, this may not sound a lot of money but it does come on top of three other rate rises and a steady increase in the cost of unsecured borrowing. And with many people already at breaking point, an extra £16 a month could make a real difference.

However, I wouldn't want anyone to panic themselves into remortgaging. After all, people need to enter these kinds of decisions with a clear head. There are also a few things to watch out for, including mortgage arrangement fees, early redemption charges and increased lending charges. Borrowers should always find the most suitable loan – whether it be a tracker or a fixed rate – and carefully consider the length of term required.

Whatever happens, it is always best to have made some kind of decision, so that at least you're mentally and, hopefully, financially prepared for another rate hike. There's nothing worse than being taken by surprise and being at the mercy of events. Making a decision as to the future direction of your finances is an important step and one that cannot be taken lightly.

Author: Richard Mather

Interest rates go up – but what next for homeowners?

As expected, the Bank of England's monetary policy committee raised (MPC) interest rates by 0.25 per cent today, which is good news for savers but bad news for mortgage holders.

Ever since it was revealed that consumer prices inflation broke through the three per cent barrier in March, finance experts and banks have been preparing customers for the inevitable and homeowners have responded by remortgaging to cheap fixed-rate deals.

Of course, pundits love to be proved right when it comes to interest rates, although they're probably not in the same financial dire straits as many of their fellow citizens, who are up to their eyes in debt. For example, today's announcement means that a homeowner with a typical £100,000 mortgage will have to find another £16 a month – and this follows three rate hikes that took place between August and January.

While any rate rise is bad news for households – especially those who didn't read the signs and failed to remortgage – at least it wasn't the dreaded 0.5 per cent hike that some pundits were predicting. If this had happened it would have been the first time in the MPC's ten-year history that rates had gone up by half a per cent in one go.

Having said that, there is a strong possibility that rates will rise again at some point over the next three months, which could be something of a problem for homeowners already struggling with mortgage payments and other monthly outgoings, such as council tax, utility bills and unsecured debt repayments.

However, for those of you who have already remortgaged to a good rate, it is unlikely that a further rate hike will have much of an impact as I have a strong suspicion that many lenders factored in this possibility before publishing their new rates at the end of April and the beginning of May.

This means that homeowners are now roughly split into two camps – those who made the effort to remortgage and those who didn't for various reasons. However, today's news – which has been overshadowed by Tony Blair's resignation announcement – will probably be the impetus needed for borrowers to get their house in order before the MPC makes its next decision in June.

But this begs the question, what if rates don't go up again? This is not a spurious question but something that is being asked by some experts, who believe that inflation is about to come down as the UK's lending cycle peaks.

Not so long ago, I remember reading that home loans expert Ray Boulger from mortgage broker John Charcol believes it could be too late for households to protect themselves against further rate increases. He went on to say that borrowers could be better off going for a variable-rate mortgage, especially if rates have reached their peak and take a downward turn in the near future.

Of course, while this kind of view is an interesting addition to the rates debate, it is more than likely that households will be eyeing up the latest fixed-rate deals in the windows of their bank or on the many websites devoted to this issue.

Author: Richard Mather

Homeowners in limbo as interest rate decision nears

Next week, the Bank of England will announce whether interest rates are going up, coming down or staying the same. The smart money is on a rate hike of 0.25 per cent, although it is impossible to be certain. Back in December, it was widely held that rates would still stay on hold the following month, but the bank did its own thing and surprised everybody by raising the cost of borrowing.

Anyway, what I'm trying to say is that nothing is certain when it comes to money and economics, but this has not stopped mortgage lenders pulling their best products and replacing them with more expensive ones. Nor has it stopped price comparison sites and other speculators lamenting the demise of the cheap fixed-rate loan. Indeed, their repeated cries for borrowers to take action now and remortgage to a good deal have sounded something like a call to arms in recent weeks.

In addition to this month's rate rise, there are experts aplenty who expect rates to rise more than once after May, which means we could end the year with a base rate at 5.75 or six per cent. Last month, a group of economists wrote an open letter to our economic overlords suggesting that rates may have to rise to seven per cent next year to bring inflation into line.

However, more moderate analysts either believe this is unlikely or are unprepared to envision such a scenario, especially as it is a reminder of the boom-and-bust days under the Tories in the 1980s and early 90s.

You can't really blame people for getting into a tailspin about all this. Just a small rise in monthly outgoings could prove very difficult for some households, especially if they are already struggling with unsecured debt, council tax requests and energy bills. It is not surprising that many homeowners are taking a 'safety first' approach to their finances and signing up to a fixed-rate deal. At least this way they have the security of knowing their outgoings won't rise every time the Bank of England pushes up rates.

Despite all the excitement, the Council of Mortgage Lenders expects inflation to fall back to two per cent in a matter of months and has warned against pessimism in the market. In fact, some experts believe that the UK is near the peak of its current tightening cycle and that the interest rates will start to come down next year. If this is the case, then some brave homeowners may be willing to enter into a variable rate deal now, which could mean higher mortgage payments over the next few months and reduced payments when rates start to fall in 2008.

Over the past week or so, lenders and price comparison sites have been much less vocal about mortgages, an indication perhaps that we have entered the calm before the storm. The media are much more focused on the political implications of the May 3rd elections – a full week before the Bank of England announces its decision. The closer we get to the rate announcement the less point there is trying to predict the future, although it is fairly safe to say that until the bank decides one way or another, households across the country are in limbo.

Author: Richard Mather